Your mortgage term definitely matters. It represents the duration between when you sign your mortgage papers and the time your loan comes up for renewal. And there are a lot of options – although five years is the most popular, mortgage terms in Canada typically range between six months and 10 years.
By understanding your mortgage loan terms, you can select the one that makes the most sense for you, with the goal of saving money along the way.
When comparing available mortgage terms, it’s important to understand that a longer term generally means a higher corresponding interest rate. And, on the flip side, a shorter term generally means a lower corresponding interest rate.
But don’t let this generalization lead you to believe that a shorter term is always the preferred option. Sometimes there are other factors – either in the financial markets or in your own life – that you’ll also want to factor in when selecting the length of your mortgage term.
Things to consider when choosing your term
If you’re just starting out as a first-time homebuyer, for instance, and paying your mortgage each month places you close to the financial edge of your comfort zone, you may want to select a longer mortgage term, such as five years, so that you’ll be able to afford your mortgage payments even if interest rates increase.
The logic here is that, by the end of a five-year mortgage term, most homeowners are in a better financial situation, have a lower outstanding principal balance and, should interest rates have risen throughout the course of your term, you’ll be able to afford higher mortgage payments.
If you’re looking for a mortgage on an investment property, you’ll also likely want to consider choosing a longer mortgage term – depending, of course, on your overall plan. This will add reassurance that the mortgage payments on the property will be steady for a long time, enabling you to project the property’s future income more accurately.
On the other hand, if you know you won’t be staying in the same home for the next five years, opting for a shorter term can save you significant fees when it comes to early payout penalties associated with breaking a mortgage before the term is up.
In order to properly advise you on ideal mortgage term options, your mortgage agent must understand your short- and long-term goals, as well as your personal financial situation and tolerance for risk.
Have questions about your mortgage term options? Answers are just a call or email away!